ZNGA will probably get a sympathetic bounce if the KING IPO is viewed as successful. Conversely, it will hurt ZNGA if the IPO is viewed as a failure. While KING is immensely profitable, most of the commentary has focused on the fact that interest in specific online games is transitory, as ZNGA learned a couple of years ago. The days when families would buy a Monopoly game and play with it until the board fell apart are long gone.

King Digital opened lower, on the heels of an IPO that valued the "Candy Crush Saga" game maker at more than $7 billion.

By Matt Jarzemsky Wall Street Journal

King Digital Entertainment PLC opened surprisingly lower, on the heels of an initial public offering that valued the “Candy Crush Saga” game maker at more than $7 billion.

The shares opened at $20.50 Wednesday, down from the $22.50 price offered by investors in King’s IPO late Tuesday. The deal raised about $500 million, pricing at the midpoint of the range the company had expected.

King’s shares are listed on the New York Stock Exchange under the symbol “KING.”

At $22.50, the deal raised $350 million for King and another $150 million for early investors such as private-equity firm Apax Partners LLP. The company and its shareholders sold 22.2 million shares. They have granted underwriters the option to sell an additional 3.3 million shares.

Though “Candy Crush Saga” has become a household name—attracting 97 million daily active users last month—King’s IPO didn’t have some of the telltale signs of investor interest that surrounded debuts by other consumer-aimed Internet companies like Facebook Inc. and Twitter Inc. Those companies both saw sufficient investor demand for their offerings to sell shares for higher prices than they’d originally planned.

King turned a $567.6 million profit last year as its revenue rose 11-fold to nearly $1.9 billion, underlining the success of “Candy Crush Saga,” last year’s top-grossing app franchise in the U.S. on devices using Apple Inc.’s iOS operating system, according to data provider App Annie. But some analysts say that game’s peak moneymaking days are behind it, raising the question of whether King can repeat its past success.

Meanwhile, “Farmville” maker Zynga Inc.’s stock-price slide in the year following its IPO set a dubious precedent for debuts by online and mobile-phone videogame companies, in the eyes of some investors. As of the latest close, Zynga’s shares were down 52% from the company’s December 2011 IPO price. The shares have recovered somewhat of late, rising 27% in 2014 through Monday, amid recent purchases by hedge funds such as Millennium Management LLC and Tiger Global Management LLC, according to FactSet.

“The standard term that people use to describe this kind of [business] is hit-driven,” said Rett Wallace, chief executive of private-company research and data provider Triton Research LLC.

“For all of the claims that Zynga made—and King makes the claim too—that they have a scalable, repeatable process, it just turns out that the alchemy of figuring out a thing that billions of people are going to use all the time is really hard,” Mr. Wallace said.

However, King is seeking a relatively modest valuation versus some of its peers, some analysts say. Sterne Agee & Leach Inc. analyst Arvind Bhatia estimates the company’s revenue will grow to $2.49 billion this year. At the IPO price, it would be trading at 3 times his sales estimate. Zynga trades at 5.5 times analysts’ average 2014 sales forecast.

On a price-to-earnings basis, King would also be valued at a discount to established videogame companies like Activision Blizzard Inc. and Electronic Arts Inc., according to Mr. Bhatia.

“They’re being honest with investors regarding their slowing growth rate, which I think is helpful,” said Rob Romero, portfolio manager at Connective Capital Management LLC, a Palo Alto hedge-fund firm with $120 million under management. He said in an interview before the pricing that he planned to try to buy shares in the deal.

“They need to be able to generate new games and successfully develop and market their new-game pipeline to replace the revenue that will inevitably be lost when Candy Crush begins to decline,” Mr. Romero said. “And they have such a pipeline.”

A King spokesman declined to comment on analyst and investor thoughts on its business, saying it was in a quiet period around its IPO.

King’s other games include “Bubble Witch Saga” and “Pet Rescue Saga.” Like Candy Crush, these have also cracked the top-five lists of daily active users on “primary platforms” such as Apple’s iOS, the company says in its IPO prospectus.

“Farm Heroes,” for example, which King launched in the Apple app store in January, has been among the top 10 highest grossing apps for the iPhone among U.S. users every day since early February, according to App Annie. But “Papa Pear,” which launched as a mobile app last November, has fallen off from the top 30 highest-grossing iPhone apps in January to the top 40 in March, App Annie data showed.

And in the last three months of 2013, “Candy Crush” accounted for 78% of King’s gross bookings, a financial metric similar to revenue, according to its prospectus.

J.P. Morgan Chase & Co. is leading the deal with Credit Suisse Group AG and Bank of AmericaMerrill Lynch.

So the company came out at a fairly reasonable price and didn't need people to hype the stock, therefore it's down. I happen to catch CNBC this morning and Cramer was absolutely trashing the IPO, fwiw. Makes you wonder if he didn't get the allocation he wanted (g).

Are you suggesting that analysts and commenters can be bought? How shocking. :)

And here I thought that pay-for-play was limited to Illinois politics.

The KING offering was getting trashed from the moment they filed their registration statement. It is hard to fault management for monetizing value for their shareholders, even if it may be transitory, and raising a pile of cash. I honestly don't know how to value the company. It didn't help that some of its existing shareholders sold stock in the offering.

One night in March, 2013, Rami Ismail and his business partner Jan Willem released a game for mobile phones called Ridiculous Fishing. Ismail, who was twenty-four at the time and who lives in the Netherlands, woke the following morning to find that the game had made him tens of thousands of dollars overnight. His first reaction was not elation but guilt. His mother, who has a job in local government, had already left for work. “Ever since I was a kid I’ve watched my mom wake up at six in the morning, work all day, come home, make my brother and me dinner—maybe shout at me for too much ‘computering,’?” he said. “My first thought that day was that while I was asleep I’d made more money than she had all year. And I’d done it with a mobile-phone game about shooting fish with a machine gun.”

Ridiculous Fishing made a hundred thousand dollars in its first month on Apple’s App Store. It won the Design Award at the 2013 Apple Worldwide Developers Conference and continued to sell well, passing a million dollars in sales within six months of its release. Ismail and Willem had begun making games together while in college, and to create Ridiculous Fishing they had worked in borrowed office space and subsisted on a diet of instant ramen. “Somewhere in the back of your head you know that you worked hard, that you sacrificed your stability and you took on the risk of financial ruin for a long while,” Ismail told me. “You did things that other people were not willing or capable of. And that paid off. But, even so, it feels awful. I couldn’t get rid of the image of my mother in her car, driving to work.”

Ismail is not the only game maker who, in recent years, has struggled to adjust to unexpected financial success. Today, makers of independent games can earn a windfall far more swiftly than their counterparts in film or music. A game developer is able to work alone, on a laptop in a public library or in a one-bedroom apartment. Then, when a game is finished, online stores such as the App Store or the digital PC-game store Steam make the work available to a global audience in an instant. Seventy per cent of every sale on Steam and the App Store goes directly to the developer. The stores release the income to developers at the end of the month.

Most games, however, do not make a great deal of money. Each month, thousands of new games are made available on Steam and in the App Store, and, although Apple boasted in 2012 that it had paid out a billion dollars to app and game developers the previous year, Forbes estimates that the average game earns just four thousand dollars. Nevertheless, if your game becomes a hit, you can become a millionaire within weeks.

Stories of sudden indie-game riches are appealing. They have a fairy-tale quality, the moral of which is often, “Work hard and you will prevail” (even though this kind of overnight success is often the result of an un-replicable recipe involving privilege, education, talent, toil, and timing). In the field of video games, which many people view as childish and pointless, these stories also have a legitimizing effect: they measure the medium’s worth in dollars, when its artistic and moral worth is more questionable. Profiles of prominent indie game makers often lead with details of their financial success.

But for many of these young game-maker millionaires, who created their work out of a passion for play rather than prospecting, the wealth and attention can be jarring. In February, Dong Nguyen, the creator of Flappy Bird, a recent iOS game that had inexplicably risen to the top of the App Store charts, stopped selling his game even though it earned him an estimated fifty thousand dollars a day. “I am sorry ‘Flappy Bird’ users,” he tweeted at the time. “22 hours from now, I will take ‘Flappy Bird’ down. I cannot take this anymore.” He added that the game had “ruined” his “simple life.” (He said in an interview with Rolling Stone that the invasion of his privacy by press and paparazzi, who had camped outside his home in Vietnam, had been a major factor in his decision.)

Ismail said what happened to him was like winning the lottery, with all of the complicated emotions that come with it. He has since sought out other developers whom he perceived to be on the cusp of a similar windfall, to talk them through the emotional landscape they might find themselves in and some practical considerations. “I advise them to find one thing to buy with the money,” he said. Buying something tangible makes it more real. It’s a healthy thing to do.”

In October, 2013, Ismail travelled to Austin, Texas, to visit Davey Wreden, the twenty-four-year-old creator of a game called The Stanley Parable. Ismail had a hunch the game would be a commercial success. “I offered Davey my advice, and he went out to the store,” Ismail said. Two hours later, Wreden returned home having decided how, if his game sold well, he would spend the money. “He said that he would go to the store and buy the cheapest and most expensive salmon,” Ismail recalled. Wreden would then cook the two fish side by side and conduct a taste test to see whether the cost difference was justified.

Wreden’s game has sold six hundred thousand copies, generating an estimated 6.3 million dollars for him and the game’s artist, a British teen-ager named William Pugh. Following the success, Wreden bought a Ping-Pong table. He said that he planned to try the salmon experiment, too. Ismail’s indulgence had been to buy each of the video-game consoles he had previously been unable to afford. Markus Persson, who earned more than a hundred million dollars in 2012 from his game Minecraft, told me in 2013 that he also initially felt guilty about his newfound wealth and mostly limited his luxury to the latest computer. (He has now acclimatized somewhat, he says, and travels by private jet and hosts lavish parties for friends and fans.)

Despite Ismail’s warnings, Wreden still felt isolated and confused after his success. In February he wrote a frank blog post about the “depression” he has felt. He described an imagined conversation with someone chastising him for complaining. “Oh, yeah, we get it, real rough life you’ve got there,” he wrote. “Sounds pretty miserable to be loved for your art. Maybe go cry about it into a pile of money?”

For game designers, the pressure to replicate a former success can be far more paralyzing than simply deciding how to spend the money. Persson recently cancelled 0x10c, the game he left Minecraft to develop, citing a “ creative block.” For Wreden, a major part of the problem is the scope that the money gives him to increase the ambition of his next project—like a filmmaker who moves from recording with a camcorder to managing a full-scale Hollywood-style production. “I like limitations,” Wreden told me. “It’s intimidating to think that we have enough time and resources to do whatever we want.”

Some have chosen to put all of the money earned by their first success into a subsequent project. Jonathan Blow, the creator of Braid, a 2008 Microsoft-published game that was, arguably, the first mainstream indie success, also became a millionaire through his game. Blow’s single extravagance was the purchase of a crimson Tesla Roadster for a hundred and fifty thousand dollars. He funnelled the remainder of the money he earned—which he estimates to be around four million dollars—into his next game, The Witness, due for release later this year. Blow’s production comes with increased risk: it will need to sell many more copies than Braid to make back its costs. Blow says he doesn’t feel any pressure to turn a profit. “I am just pursuing the ideas that I myself find most interesting,” he told me. “I am not trying to make the most mass-market thing.”

In 2010, after eighteen months of development, Edmund McMillen released Super Meat Boy, a fifteen-dollar game that has since sold more than two million copies. McMillen’s story was featured in the documentary “Indie Game: The Movie,” which he believes helped propagate the idea that independent-game development is an easy route to wealth.

McMillen receives e-mails from people who have quit their jobs to follow his example. “I’m glad the film inspired people, but I don’t like the feeling that I’ve perpetuated a myth that people can get rich making games,” McMillen, who spent close to a decade working on games from his single-room apartment, said. “The money has made relationships complicated,” he said; distant family members and old acquaintances from school have approached him to ask for financial help. “I’m just a guy who makes games. I’m an artist who likes to be alone. This success has artificially elevated me; it’s caused jealousy, even hatred.” For this reason, McMillen stays away from industry events and other places where he might be recognized. He maintains that he has made money in order to continue to make games, and not the other way around. “If my games hadn’t sold, I would be in my crappy one-bedroom apartment making more games,” he said. “Maybe I’d be even happier than I am today.”

Above: Jan Willem and Rami Ismail, the game makers behind Ridiculous Fishing. Photograph by Jim Wilson/The New York Times/Redux.

I understand the worries. Don't get me wrong. At the same time, the cash flow KING is generating should allow them time to either build a few new revenue streams or buy them if their production falls short. They came to market at a great time for the company but not for the stock, IMO. It will be interesting to see if they can produce more in the near future or if they see their revenue drop significantly over the next couple of quarters. The cash they built from the IPO will help big time.

Many IPOs can't perform to the standards of the market's expectations. Whether it's a few years or a few quarters is a big question for many newly minted issues. We saw this with ZNGA.

GRPN, to me, is another excellent example. Maybe I'm wrong but I think they're a few quarters away from starting to live up to those expectations. It may be a bit longer than that but I think they've done many of the "right things" to build their franchise. This has not directly translated into earnings power yet and they've been trading long enough for those who "bought the initial hype" to be frustrated.